UOB - Unclear Outlook, But Value Is Emerging

UOB's 3Q18 met consensus.

Stress-tested its portfolio.

Fair Value drops to S$28.80.

3Q was broadly in line with expectations

UOB posted 3Q18 results which were broadly in line with market expectations.

Net earnings of S$1037m were up 17% y-o-y and -4% q-o-q, versus consensus of S$1011m. Net Interest Income showed strong double-digit growth, up 14% y-o-y and 4% q-o-q to S$1599m. However, Net Interest Margin (NIM) disappointed, and eased off from 1.83% in 2Q18 to 1.81% in 3Q18. Management attributed this to efforts by the group to build up its funding.

Non-interest Income fell 4% y-o-y and 9% q-o-q to S$728m. Cost-to-income ratio eased off slightly from 43.6% in 2Q18 to 43.4% in 3Q18.

Allowances fell from S$221m in 3Q17 to S$95m this quarter, but were higher than S$90m in 2Q18. Non-performing loan ratio improved from 1.7% last quarter to 1.6% this quarter.

Challenging market conditions ahead

Despite current market concern over the potential impact of the trade war on Asia, management is fairly positive about its funding position and its well-placed regional operations. There is uncertainty over the potential flow of manufacturing activities into South Asia, and we have seen cuts in 2019 economic and corporate earnings growth forecasts.

As the cost of funds has gone up, it is now an increasingly more challenging business environment and this could result in some margin compression.

Management has guided for mid-to-high single-digit loans growth. Management has also stress-tested its portfolio and is of the view that the overall situation is still manageable currently. Wealth management fee growth is projected at about 10%, focusing on its regional wealth business across various segments.

Against the uncertain global environment, it will continue to focus on containing cost (cost-to-income has come off this quarter) while building its regional capability.

Drop Fair Value to S$28.80

We are expecting NIM to hold at current levels and do not expect NPL to deteriorate despite the ongoing trade war. We have kept our FY18 earnings estimates as 3Q18 was broadly in line with our projections.

However, with the recent weakness in the market, peer valuations have dropped rapidly in the past few months. In tandem with this, we are dropping UOB’s fair value estimate from S$32.09 to S$28.80, pegging it at 1.2x book or a discount to 1.3x previously (which was the 10-year average).

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